“The eyes of the world are focused on the near-term outlook, due to the volatile state of the international oil market … This constitutes only part of the challenge facing us. We are also committed to the future of the industry.” Wise words from an Opec representative, these could have been spoken yesterday. In fact, they go back 20 years – so, did Opec do a good job of anticipating and preparing for that future?
This speech was made in Moscow in October 2004 by Dr Maizar Rahman, Indonesia’s Opec governor, who was representing the Secretary General. The challenges the group was wrestling with then, rather different from today’s, are still crucial to understanding where it should go now.
Opec today faces several near-term challenges: economic volatility compounded by US-inspired trade wars, uncertain demand in China and balancing the demands of its members and its Opec+ allies, notably Russia. And it has to focus too on the bigger picture: competing producers, rising non-oil alternatives and the imperatives of climate policy.
To respond appropriately, it needs to tread the short-term path, managing market balances month-by-month, while charting a realistic long-term strategy. It has decided to begin easing its production cuts gradually from next month, though it might again pause the increases depending on market conditions.
And it has laid out a schema of compensation cuts, to make up for past overproduction. This compensation mainly applies to Iraq, Kazakhstan and Russia. If fully adhered to – an unlikely outcome – while regular planned increases go ahead, then output from Opec+ would actually decline, and not exceed the February level until October.
This market tinkering is important, but so is a long-term historic perspective.
Like today, 2004 saw geopolitical upheaval, including the US occupation of Iraq, political protest in Venezuela and the campaign by the Russian state to grasp control of its oil industry after the detention of tycoon Mikhail Khodorkovsky in October 2003. Extreme weather – US hurricanes – had dented the petroleum industry.
The early phase of the surge in Chinese oil demand raised ever-greater concerns about “running out” of oil, inadequate future investment and Chinese companies’ seizing control of global resources. Co-operation with Russia was important, though the goal of formal alignment with Opec remained out of reach for another decade. Dr Rahman’s speech, though, only addressed the environment in passing and did not mention climate change.
He noted that oil prices had slipped above their intended $22-$28 per barrel band, which had “won wide acceptance among producers and consumers, as being both fair and reasonable”. They averaged $45 per barrel in the month of his speech. Excluding the brief Covid crash, prices have never gone below $30 since. Adjusted for inflation, the price then would be $75 per barrel now, a little above where Brent crude is trading today – so effectively prices are back now where they were two decades ago.
In 2004, Opec’s ceiling, excluding Iraq, was 27 million barrels per day. We need some adjustments to compare that to today, adding back non-quota bound Iran, Venezuela and Libya, and Qatar and Indonesia, which have subsequently left Opec, but leaving out Iraq, and the new joiners Congo, Equatorial Guinea and Gabon. The equivalent now would be about 24 million barrels per day. Yet Opec in 2004 thought that now it would be supplying 58 million bpd!
The main losers, due to combinations of natural production declines and political turbulence, are Algeria, Iran, Libya, Nigeria and, especially, Venezuela, which lost 1.8 million bpd over this period. Kuwait is essentially flat, the UAE has gained about 400,000 bpd of production, and Iraq is the biggest winner, up from 1.8 million bpd to 4 million bpd. But Saudi Arabia, which has borne the main burden of Opec adjustments, is down about 500,000 bpd.
Meanwhile, global oil demand has risen from 81.8 million bpd in 2004 to an anticipated 105.2 million bpd this year. Opec’s market share has consequently shrivelled from 36 per cent to just 25 per cent. Even including the Opec+ members, this stake rises only to 38.6 per cent – barely above where Opec alone was 20 years ago.
As noted, prices today, corrected for inflation, are a bit lower than in 2004. So Opec’s policy over these two decades does not look like a success. Even at the level of individual countries, Saudi Arabia has not been able to capitalise on the misfortunes of Iran, Venezuela, Libya and Nigeria. The co-operation with Russia has at least mostly succeeded in restraining output rises there.
The primary reason for this shortfall in both volumes and price is, of course, the rise of US shale output, not foreseen at all in 2004. It expected non-Opec to reach “a plateau of 55–57 mb/d in the post-2010 period”; in fact, non-Opec pumped more than 70 million bpd last year, with further gains to come.
The Vienna-based organisation, though, repeatedly facilitated that surge by not intervening decisively to cap spikes in oil prices, as in 2008 and 2022, and by tolerating higher prices for longer periods, as in 2011-14 and 2023-24. Its price band turned out to be not a band, but only a floor.
Partly because of these high prices, oil consumption has not reached the heights expected in 2004. Global energy demand today is even higher now than Dr Rahman expected, but within that, he forecast oil demand this year to be 115 million bpd; in fact, it is at least 10 million bpd lower.
The organisation also underplayed non-fossil fuels. They forecast the combined share of nuclear, hydropower and other renewables in global energy to drop to just 8 per cent; in fact, it rose to 18.5 per cent by 2023 and will continue rising fast. Oil and gas, anticipated to make up 67 per cent of primary energy now, were in fact just 55 per cent in 2023 and will have slipped further.
US production is suddenly in a vulnerable spot today: facing rising costs because of tariffs, depletion of its best sites, industry consolidation and investment uncertainty. “What project in the Gulf of Mexico is gonna be drilled at $50 oil? None,” says shale pioneer Scott Sheffield.
Opec+ has a chance today to stitch together compensation cuts with rising target production to regain market share while keeping all members on-board. But if an Opec representative speaks for the next two decades, they should be bolder on output, faster to counter price spikes, and keener to the dangers of demand destruction, competing suppliers and the ever-rising tide of new non-carbon energy.
